Court Must Balance Chapter 11 Trustee’s Rule 2004 Discovery Request Against Cost to Creditor

By: Patrick O’Connor

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Bankruptcy Rule 2004(a) provides that “[o]n motion of any party of interest, the court may order the examination of any entity.”[1]  Although the purpose of Rule 2004(a) is to permit a broad investigation into the affairs of the debtor, the court in In re China Fishery Group Limited determined that the intended broad scope of the rule allows a trustee to invoke it to investigate a creditor’s alleged interference with the bankruptcy process.[2]

HSBC-HK, together with other lenders (“Club Lenders”), loaned a group of seventeen holding companies (“debtors”) $200 million.  Within one month of closing this deal, Peruvian Andes Group, parent of the debtors, began to struggle financially due to poor fishing seasons and the resulting loss of revenue.[3]  Consequently, the debtors filed for chapter 11.  HSBC, still owed $96 million, filed claims against the debtors.[4]  CFG Peru, although it too had filed for chapter 11, was a competing creditor of HSBC-HK and did not owe anything to HSBC-HK.

The court-appointed chapter 11 trustee of CFG Peru filed a Rule 2004 discovery motion to examine HSBC-HK’s conduct after the debtors filed for chapter 11.  HSBC-HK objected to the motion, arguing that it did not have a relationship, contractual or otherwise, with CFG Peru.[5]  The trustee alleged that HSBC-HK, a competitor and creditor, had aggressively interfered with the operations of the debtors in order to obtain repayment, including direct communication with the debtors’ suppliers, customers, working capital providers, and employees.[6] The trustee argued that the allegations were based on public information, and that the Rule 2004 motion should be granted to investigate how HSBC-HK negatively impacted the debtors’ ability to resume normal operations.[7]  The trustee contended that the results of his investigation could (i) support defenses to the claims filed by HSBC-HK (avoidable transfers, equitable subordination, lender liability, and other affirmative estate claims) and (ii) identify other claims and causes of action the estate may have against other parties.[8]  

Rule 2004(a) has been likened to a “fishing expedition.”[9] It is designed to “assist a party in interest in determining the nature and extent of the bankruptcy estate, revealing assets, examining transactions and assessing whether wrongdoing has occurred.”[10] Here, the bankruptcy court recognized that the trustee for CFG Peru was a party-in-interest under Rule 2004(a) and that the trustee had standing to seek Rule 2004(a) discovery because CFG Peru is a creditor of each of the debtors.[11]  Although the scope of discovery under Rule 2004 is broad, it is not limitless.  A court must weigh the competing interests of the parties, balancing the relevance and necessity of the examination against the certain disruption and cost to the target of the examination.[12] A court may deny a Rule 2004 request when the movant seeks discovery into matters that are not relevant to its basic inquiry or if the movant seeks the examination “for purposes of abuse or harassment.”[13]

The court in China Fishery Group allowed the trustee to utilize Rule 2004 to investigate a competing creditor’s interference in the trustee’s duties relating to the debtor.  The most significant aspect of this case is the court’s explanation of the balancing test between the burden placed on the target of the examination and the potential benefits to the movant.  Here, the trustee was permitted to obtain discovery of HSBC-HK to assess the value of CFG Peru’s financial condition, overcoming HCBC-HK’s objections that the trustee might have realized enough value to satisfy CFG Peru’s creditors in full without having to pursue costly litigation.[14]